Charlotte, N.C.-based investment management firm Babson Capital Management closed Babson Mid-Market CLO Ltd. 2007-II, the firm's first CLO to focus on middle-market loans, and the eighth CLO closed by the U.S. bank loan team in the past two years.
Babson's latest fund, an extension of the bank loan team's existing platform, which has historically invested in broadly syndicated deals, will allocate approximately 50% to companies with $50 million to $500 million in annual revenues. The other half will be invested in broadly syndicated loans. "It could ebb or flow 10% on either side of that, but that is the target," said Russ Morrison, head of portfolio management and research for Babson's U.S. bank loan team.
The fund began more than a year ago with the hiring of Anthony Sciacca and Ken Gacevich as managing directors and co-heads of the firm's middle-market team in April 2006, Morrison said. "As an investor and an asset manager, we have always liked the relative value that the middle-market loans have offered. This was the final stage of a development that was well over a year in process," he said.
The weighted average cost of the debt for the transactions was Libor plus 49 basis points; triple-B and double-B tranches priced at Libor plus 170 basis points and Libor plus 365 basis points, respectively. While middle-market oriented funds typically price wider than pure broadly syndicated deals since they are slightly riskier from a liquidity standpoint, pricing was on target with the firm's objectives, Morrison said.
While the timing and size of the next fund will depend on market conditions, the structure will remain the same for the most part, Morrison said. "When you see us do middle market, this will be the kind of format you will see: a mix of broadly syndicated and middle market."
While some investors see the lack of liquidity as too high a risk, others like the chance to get a bit more spread. And the fund was well received, Morrison said, with $400 million being a target size. Babson Mid-Market CLO is already predominantly invested. "On a traded basis, the fund is at $400 million in investments," he added. "It is just a matter of selling the positions now, and we are in line with what our original target mix was."
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